Bernanke Says Fed May Decide Not to Sell Securities

By Caroline Salas Gage and Joshua Zumbrun -
Feb 27, 2013

Federal Reserve Chairman Ben S. Bernanke said the central bank may decide to hold bonds on its
$3.1 trillion balance sheet to maturity as part of a review of
its strategy for an exit from record monetary easing.

Bernanke told lawmakers in Washington today that he expects
to revisit “sometime soon” an exit plan that policy makers
outlined in June 2011.

Under that plan, the Fed would cease reinvesting some or
all principal payments from its securities, revise its interest-
rate outlook, raise the federal funds rate and then start
selling housing debt to eliminate it from the central bank’s
portfolio in three to five years.

“The one thing we could do differently” is “hold some of
the securities a little longer,” Bernanke said in response to
questions from members of the House Financial Services
Committee. “We could even let them just run off.”

Bernanke is the third policy maker in the last week to
voice support for altering the central bank’s exit strategy to
delay or eliminate asset sales. Governor Jerome Powell said Feb.
22 that the Fed could refrain from sales to avoid causing market
disruptions and having the Fed take losses on the securities as
interest rates rise.

San Francisco Fed President John Williams told reporters
after a Feb. 21 speech in New York that, given the increase in
the Fed’s balance sheet, the period of time over which it’s
appropriate to sell assets “probably has lengthened.” Telling
markets the Fed plans to hold assets for longer would strengthen
monetary stimulus and be “beneficial to the economy,” he said.

How Long

Bernanke echoed that view today. “One issue is how long to
hold the securities and whether to use that as a substitute, an
alternative to asset purchases,” he said. “That’s something
worth discussing.”

The Fed is purchasing $85 billion of Treasury and mortgage-
backed securities a month in an effort to spur the economy and
reduce a jobless rate that stood at 7.9 percent in January.

If the central bank refrains from sales “the primary
benefit is they will not distort the financial system and they
don’t run the risk of adding price instability into those
markets,” said Ian Lyngen, a government-bond strategist at CRT
Capital Group LLC in Stamford, Connecticut. “That has always
been a concern of the Fed.”

Bernanke said today the central bank’s easing policies are
helping to improve demand for homes and cars by lowering long-
term interest rates.

Bernanke ‘Confident’

The Fed chairman said he’s “pretty confident” that the
“basic outline” of the exit strategy policy makers agreed upon
would “still be in force.”

If the Fed doesn’t sell any securities, “it doesn’t mean
that our balance sheet is going to be large for many years,” he
said. “It just would be maybe an extra year. That’s all it
would take to get back down to a more normal size.”

The Fed’s record $3.1 trillion balance sheet includes $1.74
trillion of Treasuries, $1.03 trillion of mortgage-backed
securities and $74.6 billion of Federal agency debt as of Feb.
20. In 2007, prior to the financial crisis, the total balance
sheet was less than $900 billion.

In other remarks today, Bernanke said recent increases in
some interest rates may signal the economy is gaining vigor.

“The fact that interest rates have gone up a bit is
actually indicative of a stronger economy,” he said.

Economy Accelerating

The world’s largest economy has shown signs that it will
resume growth after gross domestic product unexpectedly shrank
0.1 percent in the fourth quarter. Reports today showed that
orders for U.S. durable goods excluding transportation gear
jumped in January by the most in a year and contracts to buy
previously owned homes climbed more than forecast.

“We are getting some traction in the housing market, in
automobiles and other durable goods” and to “some extent in
investment” and commercial real estate, Bernanke said.

U.S. stocks rose, sending the Standard & Poor’s 500 Index
higher for a second day, amid economic optimism after the
better-than-estimated housing and durable goods data. The S&P
500 climbed 1.3 percent to 1,515.99 at the close in New York.

Fed policies also helped to lift the index to a five-year
high on Feb. 19 (SPX), giving support to consumer spending. Bernanke
said yesterday in testimony that U.S. share prices don’t appear
to be overvalued.

Some interest rates have risen in recent months. The rate
on a fixed 30-year mortgage climbed to 3.56 percent in the week
ended Feb. 21 from a low of 3.31 percent on Nov. 22, according
to data from Freddie Mac.

The yield on the 10-year Treasury note was 1.90 percent at
about 4:23 p.m. in New York, up from a record low of 1.379
percent on July 25.